How America can overcome the challenges of an aging population

Editor’s Note: We’ve spent a lot of time on this page detailing America’s aging workforce as older workers stay on the job longer. But we’ve also noted the effects of baby boomers dropping out of the workforce – a particular concern for funding Social Security, which our columnist Larry Kotlikoff repeatedly tells us is already a vastly underfunded program.

The American economy will have to adjust to meet the challenges of this demographic change. But who’s to say that those adjustments are to be feared or resented? This is an opportunity, says Milton Ezrati, senior economist and market strategist for Lord, Abbett & Co. and an affiliate of the Center for the Study of Human Capital at the State University of New York at Buffalo. In the following essay, adapted from his new book, “Thirty Tomorrows,” Ezrati argues that attuning our regulatory, workplace and innovative standards to meet this demographic challenge will deliver net benefits to the American economy and its workers.

The fear is widespread. It surfaces at investment gatherings across the country, business meetings, even Rotary lunches. The aging population worries people. Elders voice concerns about the viability of the pension systems on which they rely. The young fret that the demands of an ever-larger population of retirees will burden them indefinitely or until they retire into poverty. Financial professionals stress over market stability.

In one respect, people have reason for their fears. Decades of low birth rates have slowed the flow of young people into the workforce just as the retirement of the baby boomer generation promises to enlarge the population of dependent retirees. The Census Bureau estimates that by 2030 the number of working-age people available to support each retiree will fall from just over five today to barely three. Such a lopsided mix of producers and consumers indeed threatens to distort finance and constrain economic growth prospects.

Even so, despair would be misplaced. The doomsayers – and there are many – assume, incorrectly, that people will simply stand by passively while demographic trends destroy their prosperity. History shows the opposite to be true. To protect what they have, people, firms and governments almost always will do whatever is necessary. And there is much they can do.

The United States and other developed economies of the world already have many ways to supplement their relative loss of productive, tax-paying and pension-contributing workers. Still, those efforts will demand massive changes in each economy’s focus, in the nature of its workplace, geopolitical strategy, even their workers’ self-image, particularly in America. But those efforts can result in long-term net benefits for America and its workers.

Each answer to this demographic challenge will demand its own set of basic adjustments – some of which will reshape our workplaces in positive ways. For example, one antidote — getting older workers to extend their careers — will force employers, both private and governmental, to become much more flexible about work schedules and pay scales than they have ever been.

Another — encouraging women to stay in the workforce — will demand that these same employers do much more to accommodate child care needs, likely with on-site facilities or periods during the day to fetch children and ferry them to other supervised activities. Some firms have already begun to experiment with such work rules. Alternatively, some have looked to subsidize charter schools near work.

Of all the avenues of relief, trade and globalization offer the most promise, but they will require more of the most dramatic adjustments. Trade has always served as a way for economies to capitalize on their strengths and supplement their weaknesses. In the present circumstance, developed economies can use it to relieve demographic pressure by sending simpler, labor-intensive production to emerging economies. Things like textiles, the assembly of retail electronics and appliances, toys, household items, and low-level call centers can be outsourced elsewhere. This way, the U.S. can effectively tap the output of large, youthful and inexpensive workforces in emerging economies, even as those workers stay in their home countries.

At the same time, the United States and other developed economies can leverage their comparative advantages in worker training and education and their relative abundance of capital equipment and technology by focusing increasingly on complex, high-value production. For example, the U.S. can manufacture heavy equipment and fine machinery, and provide consulting and finance services.

The resulting division of production between domestic and foreign workers should benefit both sides. The developed economies get relief from demographic pressure. The emerging economics get to promote development and employment through exports.

There is every indication that such a symbiotic division of production can persist for an extended time. Despite widespread fears that the emerging economies will quickly catch up, that is not likely for decades. That fact should be evident to anyone who strays from the showcase city centers in China and other emerging economies and finds themselves suddenly in a third-world country.

The average worker in emerging economies has a lot less support than his or her counterpart in the United States, Europe or Japan — only 5 percent of the equipment, facilities, systems and computing power, in fact. Nor do workers’ skill levels compare. The developed world has an average literacy rate of over 99 percent. China, the best in the emerging world, has only a 91 percent literacy rate, Brazil, 89 percent, and India, only 61 percent, according to the CIA World Factbook. The average worker in China has only 6.4 years of formal education, in India, 5.1 years, and in Brazil, only 4.9 years. In the United States, the average worker has over 13 years, in Europe, eight to 10, and in Japan, 9.5.

Still, even with such educational advantages, sending simpler, labor-intensive production to the emerging economies will create considerable hardship among certain classes in society and in certain geographic regions in the United States. The fate of the textile industry in North Carolina, for instance, has received considerable attention, as has basic steel production in the Mid-West. To bring these valuable workers back to active production, these economies will need to push innovation and training, as well as retraining, of workers for the production of high-value goods like industrial fabrics, for instance, or sophisticated metallurgy. In some cases, revitalizing entire regions set back by outsourcing will require that local economies create alternative, more high-value industries to replace those relinquished to the emerging economies.

An ever more intense need for innovation will form a crucial part of this endeavor. But government will have to do more to partner with industry and encourage university-business links to fuel this innovation. A pro-innovative economy will demand other changes in economic policy. Because basic research and development carries great risk of failure, government will need to offer incentives, like stronger patent protections, for one, and be more willing to let innovators keep a greater proportion of their profits.

History certainly shows the damage that ill-conceived policies can inflict. When Europe some years ago imposed price controls on drugs and accordingly limited profitability, its pharmaceutical firms, which until that point had spent 24 percent more on research than their American counterparts, cut back in short order to 15 percent below their American competition. Analysts estimate that the change cost Europe 46 new drugs.

The innovative drive will demand a revision of regulatory regimes as well. Less intrusive regulations generally elicit more innovation, but there can be no suggestion of simply sweeping regulations away. Licensing, environmental rules, labor standards and the like offer necessary protections for the public and for future generations. Innovation would gain from a more realistic balance, one in which rule-makers explicitly consider the impact on innovation. For example, licensing that grants near monopoly status to established firms, which stifles innovation, should be rethought. Labor regulations that make hiring and firing difficult, and so also make business less flexible, might also come in for reconsideration. France provides an especially dramatic illustration of this effect. In the 1970s, French regulators blocked the growth of large-scale retailing to protect small retailers and the aesthetics of the French countryside. While their aims were understandable and even laudable, the rule nonetheless stifled the retailing revolution that, in the United States, offered tremendous job growth. One study concluded that French employment would rise by 10 percent from the relaxation of this one regulation.

While the answer to the demographic squeeze demands a reconsideration of such regulatory policies, the nature of innovation points to still other required changes. Washington stresses scientists, engineers and technicians as the essence of innovation. These people are important, to be sure, but the process also needs very different sorts of talents. All the R&D in the world will produce only limited amounts of economic innovation without the efforts of large, diverse, often low-tech groups of individuals and firms that apply the technological strides made in the lab to commercial opportunities, often in areas never dreamed of by the developing scientist and engineers.

This essential need for “lateral” developments, as some researchers call them, or “spillovers,” can be seen in the commercial opportunities that grew out of the Space Race of the 1960s. When NASA scientists developed miniaturization to solve their particular problems, it was other, much less technically proficient people and firms that saw how the new technology could facilitate hand-held devices — first radios, then cell phones, and eventually, the telecommunications revolution. The former Soviet Union provides a negative example. There, often cutting edge scientific research wasn’t reflected in the general economy because the government did not entertain what can be the chaotic process of bringing high-tech research to the rest of society.

Producing this mix of players will demand much more emphasis on training and education than ever before. Already the pressure to upgrade skill levels has induced the average American worker to increase his or her educational background from an average of 10 years in 1980 to 13 today. To meet the needs of a high-value, innovative economy and to rehabilitate the careers of those workers displaced by the economic transition, this trend of continuing education will have to accelerate.

Where higher education is concerned, the needs are equally urgent. But unlike Washington’s singular emphasis on math, science and engineering, the economic application of technology requires very different talents and ways of thinking from the intensive disciplines of more technical subjects. Preparing these future workers will require the cultivation of more extensive thinking. Perhaps, then, the liberal arts will serve the innovative process as much as chemistry, physics and electrical engineering.

All these efforts – aimed at supporting a more innovative economy, with the goal of relieving demographic strains – will, in their turn, transform the workplace. The present, top-down, hierarchical approach to management will wane. It is hardly applicable to groups of skilled workers producing high-value products who naturally prefer, and also require, a free flow of information and insight among themselves and with management.

Because so much high-value production is also customized, that free flow of communication and coordination will have to extend to customers and suppliers as well. Here, too, there are signs that such changes are already taking place. A broad cross-section of American business has begun to decrease the proportion of its workforce in straight production and management in favor of an emphasis on planning, quality control, client service and communications, according to the Bureau of Labor Statistics’ Occupational Employment Statistics. In the chemicals industry, for instance, the old managers and production people have declined more than 5 percent during the last 10 years even as those in the less hierarchical functions have increased 19 percent. In the paper industry, the respective changes represent a decline of 22 percent and a rise of 15 percent. It is already becoming a very different workplace, with more changes to come.

Amid all this practical change, America in particular will also face a psychological challenge. Its people have always viewed themselves as embracing the virtues of youth – energy, physical vitality, impulsiveness, even insouciance. These attitudes have led them to assume a global economic role as the quintessential mass producers, overwhelming the competition with huge volumes of serviceable, standardized products — the economic equivalent of brute force. It is no coincidence that America invented the assembly line and interchangeable parts. But the transformation toward high-value products, impelled by these demographic trends, will require a workforce and an approach that embraces a different set of virtues — those of patience, care, refinement and attention to detail, virtues typically associated with age more than youth. It almost sounds un-American, but the situation calls for it, and the change is all but inevitable.

The need for such a psychological shift is evident in the output of any upscale product, be it a machine, an item of clothing or a service. Rather than lard this brief discussion with examples, the need is best illustrated in an urban myth from the 1920s. As the story goes, American industrialists right after the World War I were bigger, richer, and more powerful than their European rivals, but still they chaffed at their reputation for volume over refinement. A Connecticut copper mill challenged a British rival by sending over a length of copper tubing with a dare to produce something with a diameter as narrow and consistent. When the response arrived in Connecticut, the Americans at first could find only their original tube. It took a while for them to realize that their competitor, clearly with greater care, patience and refinement, had threaded inside it their much finer piece of tubing. Now in matters much more sophisticated than copper tubing, Americans will have to exemplify the virtues and skill that the British exhibited in the 1920s.

Just this cursory description of the forces at work and the radical change they will bring should make clear how the overall picture, even as it threatens in one sense, is also both encouraging and exciting. Efforts to meet the demographic challenge have every chance of success, while the requisite revolution in innovation, regulation and the nature of the workplace will open a world of opportunities for investors, firms and individuals.

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To meet the challenges of an aging workforce and decades of low birth rates, America has the opportunity to revolutionize innovation, regulation and workplace culture. Photo by Dana Neely/Getty Images.